Turning point; hiatus

Reading around in the wisdom of others, I predicted Dow 9,000 here, here and here. Now it's happened. Good for you day-traders, but a fraidy-cat like me is staying away.

Since Marc Faber and others have been saying for some considerable time that they can't see anything worth getting into, and now the dollar is getting closer to having the carpet yanked out from under its feet, and the British pound may follow suit thanks to the miserable state of the British economy, and China is busy blowing an inflationary bubble to maintain its vampire trading relationship with the West, and the gold-bugs are chirruping ever louder (though the US Government might not only seize gold as it did in 1933, but for those smarties who invest in overseas gold stores the bad news may be that Uncle Sam will also seize US citizens' title to those stores), the question is... where to hide your stash?

For the private investor, maybe part of the answer is to look at the currency market, for a country that isn't over-dependent on international trade, has enough natural resources to survive if the world system goes down, and is reasonably stable by second or third world standards. Sadly, I have even less expertise here than elsewhere, but any thoughts on e.g. the Thai baht?

HIATUS

We're going on holiday now, to a place where cellphones don't work (and it's in the UK) and our place has no broadband. Best wishes to you all, hope to be back in touch soon.

The sun also rises

Jesse:

... the governance of Britain which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.This will go a long way in helping to understand the "British disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite.

So sorry, an error in transcription: for Britain and British, I should have written Japan and Japanese. Gomen nasai. But an understandable mistake, you may think. How much difference will a regime change in the UK make? The inclusion of Ken "fags and Bilberberg" Clarke on the Opposition team seems a deadly marker to me.

Returning to our muttons... Jesse has been focusing on the Land of the Rising Sun recently. He's pointed out that an ageing demographic structure is a major brake on the economy, especially with tight controls on immigration (though we in the UK may have have drawn the wrong conclusion from this); and today he looks at how the Japanese have organised themselves to reduce energy costs and oil dependency.

Especially the car: "I have long thought of cars as vampires sucking the economic life out of every household in the US. And the risk of death and serious injury from car accidents is about half what it is in the US (although the statistics may not be directly comparable)." And considered from a coldly economic point of view, think of the enormous overall costs of those deaths; and the possibly far greater costs of medical care and other support for the vast and growing army of injured and permanently disabled.

It's well worth reading the whole letter from Jesse's friend in Japan - not just about energy, but preventive healthcare etc. They walk to McDonald's - not waddle. They're organising themselves; so can we.

It's not going to be over by Christmas

Charles Hugh Smith thinks the current crisis will turn into a worse depression that the one of the Thirties. Citing Galbraith's study of the latter, he thinks inequality is a driving factor:

...the proximate cause was a vast income disparity which placed much of the prosperous era's profits in the hands of a small wealthy class, who then mal-invested the profits...

- in the "non-real" economy:

The financial Plutocracy, observing that actually producing goods is not very profitable unless you can fix prices [...] sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable.

Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice. When trade became less profitable than mainland farmimg, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy.

Watch that Gini coefficient rise.

More on bonds, and an alternative view

Antal E. Fekete is a professor of money and banking in San Francisco (such a beautiful place, too). He has a pet thesis about the bond market, which is that every time interest rates halve, effectively the capital value of (older) bonds doubles, to match the yield on new bonds.

So as long as we expect the government to try to stimulate the economy by lowering interest rates, there's a killing to be made in the bond market. Theoretically this could go on forever, even in a low-interest environment - the logic holds if rates go from 0.25% to 0.125% - provided the Treasury doesn't simply go straight to zero interest, of course.

Anyhow, his latest essay says that the monetary stimulus will simply be used to settle debts, since debt gets more and more burdensome in a deflationary depression; and settling debt instead of making and buying more stuff, continues to drive deflation. In this enviroment, few businesses will want to take on more debt (certain and fixed) in the hope of increasing their profits (far from certain, and very variable). On a national level, and following the ideas of Melchior Palyi, he now sees every extra dollar of debt as causing GDP to contract.

Therefore, valuations of most assets will continue to decline - except for bonds, which are now the focus for speculators. To this extent, he agrees with Marc Faber (cited in the previous post): we now have a bubble in government bonds.

But something will go bang. The real world shies from the inevitable conclusions of mathematical models. I think it will come as a crisis in foreigners' confidence in the dollar - there will be a reluctance to buy US Treasuries (we've already seen failed sales of government bonds in the UK recently, and when the next one succeeded, that's because it was a sale of index-linked bonds). Even now, the Chinese have switched from Agencies (debts of States and municipal organisations) to Federal debt, and within the latter, from longer-dated bonds to shorter-dated ones. If government debt was an aircraft, the Chinese would be the passenger insisting on a seat next the emergency exit near the tailplane.

To use a different analogy (one I've used before), drawn from the Lord of the Rings, the rally in the dollar and the flight to US Treasury debt seems to me like the retreat to the fortress of Helm's Deep: a last-ditch defence, doomed to be overwhelmed. Can we see a little figure about to save the day by dropping the Ring of Power into the lava in Mount Doom? We can hope; but you don't make survival plans based purely on optimism.

I therefore expect a transition from deflationary depression to inflationary depression, at some point. Perhaps a sort of 1974 stockmarket moment: an apparent turnaround, which when analysed can be shown to continue the real loss of value for some years. Only when national budgets are brought under strict control, will there be the environment for true growth. I don't see a willingness to tackle that, on either side the Atlantic, so disaster will have to be our teacher.

Blowing bubbles

Nobody has made economic depression and its consequences seem so inevitable and at the same time so colourful and even attractive, as Jim in San Marcos.

It's a shame that I was counting on my State pension to eke out retirement income. Looks like many of us will be using Hamburger Helper instead.

Murphy: raise interest rates!

A striking article by Robert Murphy on Mises today, about the earlier Depression of 1920-21, and how raising interest rates was the painful, but quick way out.

"... the high rates of the 1920–1921 depression had certainly been painful, but they had cleaned the rot out of the structure of production very thoroughly....Going into 1923, the capital structure in the United States was a lean, mean, producing machine."

The banking crisis: did we have a choice?

Could any of the leading nations have retained their moral fibre during the monetary inflation of the last decade and more? Wouldn't prudent, restrained lenders have lost out to foreign sellers of "liar" and "fog a mirror" loans? Wouldn't the currency have risen and crippled exports? Could considerations like this form part of the "don't shoot me" defence of our busted banks and discredited politicians?

Or would it have been a trial by fire, where the virtuous are rewarded at the end? Denninger: "It is also increasingly clear that there are literally hundreds of midsize and smaller banks that are perfectly fine. They did not lever up, they did not write a bunch of crap commercial or residential construction paper that cannot be serviced and they most certainly did not drink the KoolAid of securitized synthetic garbage debt. Even in bad economic times traditional banking is a very profitable business - so long as you lend money to people who can pay you back or you have sufficient collateral so that if they default you don't lose your shirt."

In which case, the original offence of reckless finance has been compounded by the failure to punish it. The bailouts whisk away the deserved reward of the good, and teach a hugely damaging lesson to all onlookers: you can Get Away With It.

Of course, you can't - or rather society can't, though individuals will. And when injustice finally falls, it will take down with it many of the good, the poor and the powerless.

Not Chicken Little: the sky could really be near falling

Jesse is not an air-filled doomster, yet here he has become really sombre. Pound heading for parity with the Euro, major banks insolvent, action ineffectual, hush-hush all around so the common people don't realize the gravity of the situation. It's rumour, but rumour that Jesse, clearly an experienced financial man, finds plausible.

Like I said, you've had your warning. Prepare for the worst, hope for the best.

Rolling back the State

... won't happen. Only a major disaster is capable of breaking the hands that are strangling us. But maybe that is what is now on its way.

Mish reported yesterday how the banks are insolvent, and in his opinion monetary reflation can't work , for three reasons:

1. Putting more cash into the system to create inflation to reduce the real burden of debt, won't create jobs, raise wages, or stop outsourcing (China's nominal GDP per capita is $2,483, America's $45,725, according to IMF figures).
2. But "quantitative easing" - monetary inflation - will lead to a currency drop (if it succeeds) and the reaction will be a raising of interest rates as lenders try to protect the real value of their loans.
3. And if government creates jobs directly, it again skews the economy, giving higher importance to the objects it chooses than the market would, if left to itself; in short, what economists call "malinvestment".

A longish essay over on Mises looks at how the State has seized the wealth and assumed many of the functions of the private citizen, and how the First World War and subsequent events helped accelerate a process that had begun long before.

Back in the 70s, I came across the work of Ivan Illich. His general thesis was that the State takes over activities that previously we performed ourselves - teaching our children, tending to our sick and injured, etc. These functions are then made into organisations with big buildings, many workers and officials, and large budgets - all paid for by taxation. Sociologists call this "reification". It increases the size and power of the State - and here we are.

They don't even do the job well.

As someone in education (as well as finance), I don't subscribe to the airy assertion that "our youngsters leave school illiterate", but they don't read or write as much or as well as they did, and what the liberals have done to the curriculum in English (for example) is painful to see. Heads of English in secondary schools in the 70s literally burned or threw out their schools' textbooks and coursebooks (I remember hearing of three separate cases); but the temptation to micromanage returned. It's like the historical irony that saw the French kill their King and end up with an Emperor.

And having seen the medical service in action on my wife a few years back, I no longer have the blind faith in doctors that I used to have. Phil Hammond (the GP/journalist/entertainer) tells us that the NHS kills or maims about 10% of its hospital patients, and Illich was ahead of him again (Medical Nemesis, 1974).

That's not to say we don't need doctors or teachers, but once created, institutions develop a will to live and purposes of their own, and can drift perilously off-task. Individuals who join them can become sidetracked by career opportunities and political hobby-horses, and in any case have to accommodate themselves to working in a structure run by others who have already done so and altered the operational rules to fit their interests.

Looks like the banks have done the same.

We have to hope that, however painful, after the coming changes there may be some better balance between the citizens taking care of their families, and that black hole of wealth and power, the State.

Abolish the Federal Reserve

On The Big Picture, a rude but concise video by Neal Fox about the Federal Reserve. As his catchy song points out, its existence defies the Constitution - the same Constitution that made President Obama say his Presidential Oath again.

Yet again, I say economic issues resolve into democratic ones. The Constitution is very clear that the power to create money (using gold and silver) must remain with Congress; yet in 1913 that power was given away to a newly-invented quango, run by people whose names and organisations are not permitted to be publicly known (which secrecy gives rise to some very paranoid theories!)

Why wait until its centenary to abolish it? No "four more years", please.

And while I'm on, let's have a massive cull of quangos in the UK, too.

History rhymes

The stock market is experiencing a snap-back rally, similar to what we saw in 1930, after the Crash of 1929.

You don't look that old.

Hickey: I wasn't around. They had a name for it, the "little bull market." It came about after the Federal Reserve slashed interest rates to 3.5% from 6%, and later to 1.5%...

More here.

The lesser of two weevils

In an apocalyptic - but carefully-reasoned - post, Karl Denninger says that when the deficit expansion stops, US government spending will have to be cut by 50 - 60%, unless there is to be a "general default" on debts.

I have no idea what a general default would look like, but in a closely-interwoven and distant-from-nature modern industrial society I can only fear it might prove utterly destructive. So we're back to contemplating the lesser, but still vast disaster.

I also have no idea how much worse it might be in the UK.

Someone else please read this unberobed OT prophet and tell me where he's wrong.

PS

Jesse:

While the Obama Administration cannot take a 'weak dollar' policy it is the only practical way to correct the imbalances brought about by the last 20 years of systemic manipulation. It is either that, or the selective default on sovereign debt, most likely through conflict, a hot or cold war.

How will the future look?

Thanks to the glacial catchup by the mainstream media, the public is finally worrying about economic depression, and consoling itself with the thought that we've messed it up for everyone, so at least the Chinese won't prosper and come over here as tourists, overdressed, overpaid and taking too many pictures for their digital photoframes at home.

Short-sighted, I think. On the CapitalistsatWork blog, I comment:

I think we should turn our eyes, not on the Depression, but how things will look afterwards. The East will generate demand as it aspires to the lifestyle we used to enjoy, and meantime we have been allowing them to transfer the means of production to their co-prosperity sphere. So the Chinese factories will re-open, perhaps after some of the light industry has relocated to Thailand, the poorer parts of India, and other neighbouring regions?

And I shouldn't discount India as potentially the real industrial powerhouse of the 21st Century, while China scrabbles about annexing territory for extra lebensraum, water and wood.

I think, by the way, that econinvestguru Marc Faber took up residence in Chiang Mai, northern Thailand, not to pursue a monastic existence (hardly characteristic of the formerly ponytailed playboy), but because he's close to "where it's at", or even better (and typical of this farsighted man), where it will be.

China to devalue its currency?

I said some time ago that Far Eastern creditors weren't going to let themselves be swindled by currency depreciation; now it is rumoured that China (and maybe another country also) will take their revenge and begin a dangerous round of competitive devaluation around the world.

Not the same as the last Great Depression

How it won't be

A very interesting and credible New Great Depression scenario from Drake Bennett at the Boston Globe, explaining how the grainy images of the 1930s will not be remade and colorized for the 2000s. The same, and not the same.

htp: Michael Panzner - another nugget brought in by the news miner!

Throw the grenade, or put it in your pocket?

I was educated in the wrong things. Karl Denninger explains - in a way I struggle to understand fully - how the US government's schemes to support the banks must ultimately be financed by Treasury bonds on such a scale as to seriously damage their credit rating and pump up interest rates to a ruinous level.

This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.

Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.

UPDATE

Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.

Government and homelessness

The "Pathfinder" project for urban renewal has come in for some criticism, because so far it's meant a net loss of 9,000 homes and many of those whose houses have been demolished have not received sufficient compensation to buy something similar elsewhere (see here and here, with an attempt at more balanced discussion in the Liverpool Daily Post).

I suspect we don't have a housing shortage, but a housing misallocation. There are lots of old people rattling around in houses too large for them, and too expensive for them to maintain properly. And how many million bedrooms have been converted into domestic gyms, games rooms etc? We simply expect far more space than we used to, and so the "shortage" is a function of our choices.

But there is a limit on land space, if we want to retain the capacity to feed ourselves in hard times. Maybe we should review policies on housing, housing benefit, local taxation etc. And the policy of using foreign labour to keep down wage rates, and so create traps for our working and under-classes. And is there a Gramscian plan to undermine the cultural cohesion of the country by means of deliberate negligence in border controls, with the side-effect of worsening the pressure on accommodation?

Governments have a talent for creating problems that will long survive them. After four centuries, Northern Ireland still has its difficulties. And look at Fiji, where a century ago British planters imported Indians for indentured service periods of ten years. By the end of their contractual decade, quite naturally the labourers had married, had children and put down roots in the island. The historical result is festering resentment between ethnic groups, leading to outbursts such as George Speight's rebellion in 2000.

Similarly, covering England's green and pleasant land with concrete, tarmac and brick will also have persistent unpleasant consequences. And is there any way to change it back? Could we put a foot depth of earth along a disused motorway to convert it to arable use? So, new building on agricultural land, flood plains etc is tricky, and now we are seeing some of the problems of brownfield development.

But there's a huge number of houses built in the Thirties that need refurbishment. There may be a boom in plumbers, plasters, electricians and bricklayers; while at the same time we may see growing white-collar unemployment, as a result of outsourced information-processing. Maybe the working class will be victorious, after all, while the chattering classes fill holes in their shoes and jumpers with old copies of the Guardian.

I know it can happen, because it did happen in the Thirties - read Helen Forrester, whose debt-burdened middle-class father made the mistake of leaving London post-Crash, to return to his Liverpool birthplace, where the parish had no statutory obligation to support him. Helen wrote that if the Depression comes again, the things to stock up will be newspapers, razor blades and soap. And in her case, a purse inside her clothes so that her own family couldn't steal her meagre savings.

Peter Schiff using the word "collapse"

Some hot collars in this discussion. But a question does arise for me, which is this: if the US economy has to be rebased on savings and investments, but the sinking dollar raises prices of food, fuel etc, it's going to be very hard to find the money to improve the savings rate. Especially if those who have serious money are doing what Schiff and others would recommend as their financial advisers, i.e. buying foreign stocks and holding foreign currency.

And the same goes for us in the UK, I would think.

It's going to be bad...

Mike Morgan, quoted in Mish's, is now convinced that we are headed for outright economic depression. Builders, banks and the rest of us are going to be hit very hard. This is, of course, the view of a real-estate expert in Florida, but he sees this as hitting the whole country.

We in the UK will not be immune from the general economic malaise to follow, even if unregulated immigration and a slower past housebuilding program help keep our housing assets from falling quite so far.

Another toiler in the vineyard

Safe Haven features an article by "Randy", who predicts that the American economy will go haywire. The good news is that, within a generation, poverty will make the US economically competitive again.

That's not an ironic comment. It seems to me that America's most precious heritage is not her wealth, but her love of liberty and her distrust of power. She has been seduced by Mammon and Empire, and the undoubted difficulties we face may turn out to be the last-minute rescue, the ram caught in the thicket.